Student loan servicer Sallie Mae and formerly affiliated companies have agreed to pay a total of $97 million to settle claims that it charged members of the military too much interest on their loans — and the Education Department will review whether additional federal action, including termination of its contract with Sallie Mae, is necessary.

The Justice and Education departments on Tuesday announced a $60 million settlement with Sallie Mae and related companies, and the Federal Deposit Insurance Corp. announced a separate $37 million settlement with Sallie Mae Bank and Navient Solutions, Inc., over deceptive lending practices and violations of the Servicemembers Civil Relief Act.

Text Size

-

+

reset

The Justice Department estimates that about 60,000 servicemembers will split the $60 million. The agency’s complaint alleges that Sallie Mae violated the law widely and as far back as 2005 by failing to provide members of the military the 6 percent interest rate cap they were entitled to. Until an April 30 split, Navient serviced loans for Sallie Mae.

“The intent of this law is to ensure that our service members are not stuck repaying loans under terms that are unaffordable or unfair. That is the least we owe our brave service members who make such great sacrifices for us,” Holder said at a press conference, “But as alleged, the student lender Sallie Mae sidestepped this requirement by charging excessive rates to borrowers who filed documents proving they were members of the U.S. military.”

Justice and Education also hope to send a message to other lenders and loan servicers, Holder said. “This type of conduct is more than just inappropriate; it is inexcusable. And it will not be tolerated.”

However, Navient said in a statement that the Justice Department is acting inconsistently with previous regulations.

“The large majority of the fund will be distributed by the DOJ to customers that the agency believes qualified for the benefit under an interpretation of SCRA that the company believes is inconsistent with prior regulatory requirements and guidance,” Navient’s statement says. “Nevertheless, Navient has agreed to enter into the settlement and provide such compensation in order to put the matter behind it.”

The settlement includes new provisions such as a requirement that Navient (formerly Sallie Mae) verify the military status of borrowers itself, rather than rely on the borrower to provide proof, as was previously the case. At Tuesday’s press conference announcing the settlement, Justice Department officials faulted Navient for not taking that extra step. Those service members who did not provide all the required documentation — but whom Navient did not attempt to contact for more information — will be among the 60,000 individuals compensated through the settlement.

“We offer our sincere apologies to the servicemen and servicewomen who were affected by our processing errors and thus did not receive the full benefits they deserve,” Navient President and CEO Jack F. Remondi said. “We also appreciate that the regulators agreed on consistent guidance that provides clarity and thereby enables us to offer SCRA benefits to even more service members back to as early as 2005 as well as going forward.”

Sallie Mae will also have to ask all three major credit bureaus to delete negative credit history entries service members may have experienced and the company will have to streamline the process by which members of the military get their interest rate reduction. Sallie Mae hinted at the forthcoming settlement in an SEC filing last week.

Holder said the Consumer Financial Protection Bureau brought issues with Sallie Mae to light. A 2012 CFPB report found that service members faced serious hurdles in accessing their student loan benefits, including that of the 6 percent interest rate cap.

“I have been concerned for some time about the way that military personnel are treated by their student loan servicers,” Holly Petraeus, assistant director of CFPB’s Office of Servicemember Affairs, said in a statement. “Sallie Mae gave servicemembers the runaround and denied them the interest-rate reduction required by law. This behavior is unacceptable. And it’s particularly troubling from a company that benefits so generously from federal contracts.”

The FDIC said Sallie Mae Bank and Navient solutions will pay $6.6 million in penalties and pay harmed borrowers about $30 million over past lending abuses.

Jocelyn Samuels, acting assistant attorney general for the Justice Department’s Civil Rights Division, would not say whether there was any indication that Sallie Mae was violating the SCRA as a general rule, as opposed to the servicers making a long string of unintentional mistakes.

Education Secretary Arne Duncan called it a “groundbreaking” settlement, saying that the news was both gratifying and troubling.

“Every student should have peace of mind” that they can get the benefits they’re entitled to, Duncan said.

Duncan also said Tuesday that officials would review whether Sallie Mae, and by extension Navient, violated its contract with the Education Department — which forbids it from breaking the law — in the process. The department said it would renew its contract with Sallie Mae this spring, at least two months after federal investigators discovered the violations.

“Every option is on the table,” Duncan said when asked whether the government might terminate its contract with Sallie Mae following the review. Many critics have already called on the department to do so.

In addition, Duncan said, the department’s Federal Student Aid office would review whether loan servicers across the board — not just Navient — are complying with the law.

Sen. Tom Harkin, chair of the Senate Health, Education, Labor and Pensions Committee, said the news of the Justice Department settlement with Sallie Mae “only strengthens” his resolve to put in place rules ensuring that all borrowers — “especially those that sacrifice so much for this nation” — are protected from loan servicing abuses.

“Our service members, who have been systematically denied the benefits to which they are entitled under the law and which were put in place to ensure they have an affordable education, deserve better,” Harkin said in a statement. “While some of these bad actors might think that they are too big to fail, I am committed to ensuring that student loan borrowers are no longer too small to ignore.”

“We regret any inconvenience or hardship that our customers may have experienced,” Sallie Mae Bank said in the statement. “Initiatives are underway to prevent such errors from reoccurring and apply the clear regulatory guidance these orders now provide.”